But if the Reserve Bank cuts the official cash rate by another 75 basis points before Christmas, as market pricing points to, the yield curve can be expected to steepen further, analysts said.
Kiwibank chief economist Jarrod Kerr said a positive yield curve was a sign of two things.
“One, it is a signal that the Reserve Bank is cutting interest rates but it’s also a signal that the markets are getting more confident about the long term, and are starting to price in a bit more growth and inflation,” he said.
“The yield curve is likely to steepen up further and become more positive, as more rate cuts are delivered, and the long end will hold or lift a bit with better growth and higher inflation expectations.”
In the wholesale interest rate market, two-year swaps traded on Friday at 3.79% while 10-year swaps were at 3.91%.
“Short-end rates are falling faster than long-end rates, so that’s a positive,” Kerr said.
New Zealand’s previously inverted yield curve had proven an accurate early warning system for recessions.
“We have been through that recession now and we are now seeing it turn positive,” Kerr said.
“People have been jolted out of their ‘survive to 25′ mentality, and are a lot more growth-oriented in their discussions, which is good,” Kerr said.
But Harbour Asset Management fixed income and currency strategist, Hamish Pepper, warned of the perils of reading too much into the shape of yield curves.
“While an inverted yield curve signals a recession and a positive slope is something that signals better times, I think where we have got to is that it probably matters how the curve is becoming positively shaped,” Pepper said.
“If you have got short-term interest rates responding to easing cycles and anticipated easing cycles that are reflecting very weak economic conditions, then it’s not necessarily telling you that things are great,” he said.
“You need a caveat there as to why the curve is upwardly sloping.
“This big drop in the two-year swap rate over the last two to three months is telling you that something is quite wrong here.”
Pepper said there was tension between the “soft” economic data, such as confidence surveys, and hard economic statistics.
He pointed to ANZ’s latest survey, which showed business confidence increased to the highest level in a decade in August.
Then there was the release of retail sales data for the June quarter showing a 1.2% fall against the March quarter.
“I think that with the soft data, there is a good chance that it will improve, and might even flow through into hard data over the summer,” Pepper said.
Pepper’s reluctance to celebrate a positive curve is mirrored overseas.
The Financial Times noted last week that short-term US Government borrowing costs have fallen below long-term costs.
The yield on the rate-sensitive two-year Treasury fell below that of its 10-year counterpart on Thursday, after data showed the US private sector added the fewest jobs in three and a half years in August.
An inverted yield curve has historically been seen by some investors as an indicator of a recession, even though it has not always proved accurate, the FT said.
The US bond market has been sending this signal almost continuously for the past two years.
However, investors and strategists are split on what the ending of this inversion – driven by investors increasing their bets on rapid interest rate cuts in recent weeks – might mean.
“It’s tempting to suggest we can sound the all-clear” on the economy but ‘we’re not out of the woods yet’,” Deutsche Bank strategist Jim Reid told the FT.
ANZ Bank strategist David Croy said the New Zealand market had seen the first phase of a steepening yield curve through lower short-term rates.
The key from here on in would be how the long end of the yield curve responds, he said.
Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.
